Digi International Reports Second Fiscal Quarter 2019 Results

3 weeks ago

Transformation Initiatives Drive Record Quarterly Revenues

MINNEAPOLIS–(BUSINESS WIRE)–Digi International® Inc. (NASDAQ: DGII), a leading global
provider of mission critical Internet of Things (“IoT”) products,
services, and solutions, reported revenue of $65.8 million for the
second fiscal quarter of 2019 compared to $54.5 million in the second
fiscal quarter of 2018 and compared to our guidance range of $59.0
million to $63.0 million. This reflects a 20.6% growth rate compared to
the prior year quarter.

Net income for the second fiscal quarter of 2019 was $1.3 million, or
$0.05 per diluted share, compared to a net loss of $0.1 million, or
$0.00 loss per diluted share in the second fiscal quarter of 2018 and
compared to our guidance range of $0.01 per diluted share to $0.05 per
diluted share.

Adjusted EBITDA in the second fiscal quarter of 2019 was $6.5 million,
or 10.0% of total revenue, compared to our guidance range of $4.5
million to $6.5 million. In the second fiscal quarter of 2018, our
adjusted EBITDA was $5.2 million, or 9.6% of total revenue.

Reconciliations of GAAP and non-GAAP financial measures appear at the
end of this release.

“Our results reflect the investments we have made to simplify our
business and drive success with our customers, distribution partners,
and new products” said Ron Konezny, President and Chief Executive
Officer. “We remain squarely focused on building off these results to
complete a record fiscal 2019.”

Financial Results

GAAP Results

Three months ended March 31,

Six months ended March 31,

2018

2018

(in thousands, except per share data)

2019

(as adjusted)*

2019

(as adjusted)*

Total Revenue

$

65,764

$

54,548

$

128,077

$

99,503

Gross Profit

$

30,329

$

26,834

$

60,112

$

48,793

Gross Margin

46.1

%

49.2

%

46.9

%

49.0

%

Operating Income (Loss) **

$

785

$

818

$

6,343

$

(1,181

)

Operating Income as % of Total Revenue

1.2

%

1.5

%

5.0

%

(1.2

)%

Net Income (Loss) **

$

1,342

$

(126

)

$

6,024

$

(4,613

)

Net Income (Loss) per Diluted Share

$

0.05

$

—

$

0.21

$

(0.17

)

*Prior period information has been restated for the adoption of ASU No.
2014-09, “Revenue from Contracts with Customers (Topic 606)”,
which we adopted on October 1, 2018.** The six months ended March
31, 2019 includes a gain of $4.4 million ($3.4 million net of tax) on
the sale of our corporate headquarters reported in general and
administrative expense on the Condensed Consolidated Statements of
Operations.

Non-GAAP Results**

Three months ended March 31,

Six months ended March 31,

2018

2018

(in thousands, except per share data)

2019

(as adjusted)*

2019

(as adjusted)*

Adjusted Net Income (Loss)

$

1,140

$

65

$

2,300

$

(1,657

)

Adjusted Net Income (Loss) per Diluted Share

$

0.04

$

—

$

0.08

$

(0.06

)

Adjusted EBITDA

6,548

5,245

$

12,709

$

8,208

Adjusted EBITDA as % of Total Revenue

10.0

%

9.6

%

9.9

%

8.2

%

*Prior period information has been restated for the adoption of ASU No.
2014-09, “Revenue from Contracts with Customers (Topic 606)”,
which we adopted on October 1, 2018.** A reconciliation of GAAP to
non-GAAP financial measures appears at the end of this release.

Business Results for the Three Months Ended
March 31, 2019 and 2018

Revenue Detail

Three months ended March 31,

2018

(in thousands)

2019

(as adjusted)*

Change

% Change

Product

$

52,097

$

47,588

$

4,509

9.5%

Services

3,942

2,237

1,705

76.2%

Solutions

9,725

4,723

5,002

105.9%

Total revenue

$

65,764

$

54,548

$

11,216

20.6%

North America, primarily United States

$

48,869

$

39,169

$

9,700

24.8%

Europe, Middle East and Africa

10,764

9,504

1,260

13.3%

Other

6,131

5,875

256

4.4%

Total revenue

$

65,764

$

54,548

$

11,216

20.6%

*Prior period information has been restated for the adoption of ASU No.
2014-09, “Revenue from Contracts with Customers (Topic 606)”,
which we adopted on October 1, 2018.

Total revenue increased 20.6% to $65.8 million in the second
fiscal quarter of 2019 from $54.5 million in the second fiscal quarter
of 2018.

Product

Product revenue increased by $4.5 million, or 9.5%, in the second fiscal
quarter of 2019 compared to the second fiscal quarter of 2018. We
experienced growth compared to the second fiscal quarter of 2018 across
most of our product categories, with the largest growth in our cellular
product offerings, partially offset by a decline in our network products.

Services

Services revenue increased by $1.7 million, or 76.2%, in the second
fiscal quarter of 2019 compared to the second fiscal quarter of 2018,
related to increased revenues from our Digi Remote Manager®
and support services.

Solutions

Solutions revenue increased by $5.0 million, or 105.9%, in the second
fiscal quarter of 2019 compared to the second fiscal quarter of 2018.
This increase was driven by new customer deployments, additional
purchases and equipment upgrades from existing customers, and an
increase in our recurring revenue base. We are serving just over 57,000
sites as of March 31, 2019, compared to nearly 42,000 sites a year ago.

Gross profit was $30.3 million, or 46.1% of revenue in the second
fiscal quarter of 2019 compared to $26.8 million, or 49.2% of revenue
for the second fiscal quarter of 2018. This $3.5 million increase was
driven primarily by increased sales from our IoT Solutions segment. Our
gross margin decline was primarily a result of product and customer mix
and costs associated with our transition to third-party manufacturing.

Operating income was $0.8 million, or 1.2% of revenue for the
second fiscal quarter of 2019 and $0.8 million, or 1.5% of revenue, for
the second fiscal quarter of 2018. Our operating income was driven by
our $3.5 million gross profit increase, offset by an increase in
operating expenses of $3.5 million. The increase in operating expenses
primarily included $1.9 million of additional employee-related costs,
$0.8 million in acquisition-related expenses and $0.6 million of
adjustments to contingent consideration.

Net income was $1.3 million in the second fiscal quarter of 2019,
or $0.05 per diluted share, compared to a net loss of $0.1 million, or
$0.00 loss per diluted share, in the second fiscal quarter of 2018.

Adjusted EBITDA in the second fiscal quarter of 2019 was $6.5
million, or 10.0% of total revenue, compared to $5.2 million, or 9.6% of
total revenue, in the second fiscal quarter of 2018.

Business Results for the Six Months Ended March
31, 2019 and 2018

Revenue Detail

Six months ended March 31,

2018

(in thousands)

2019

(as adjusted)*

Change

% Change

Product

$

102,909

$

86,042

$

16,867

19.6%

Services

6,424

4,663

1,761

37.8%

Solutions

18,744

8,798

9,946

113.0%

Total revenue

$

128,077

$

99,503

$

28,574

28.7%

North America, primarily United States

$

95,204

$

68,506

$

26,698

39.0%

Europe, Middle East and Africa

20,868

19,660

1,208

6.1%

Other

12,005

11,337

668

5.9%

Total revenue

$

128,077

$

99,503

$

28,574

28.7%

*Prior period information has been restated for the adoption of ASU No.
2014-09, “Revenue from Contracts with Customers (Topic 606)”,
which we adopted on October 1, 2018.

Total revenue increased 28.7% to $128.1 million in the first six
months of fiscal 2019 from $99.5 million in the first six months of
fiscal 2018.

Product

Product revenue increased by $16.9 million, or 19.6%, in the first six
months of fiscal 2019 compared to the first six months of fiscal 2018.
This increase included $5.4 million of incremental revenue from
Accelerated Concepts, Inc. (“Accelerated”), a provider of cellular (LTE)
networking equipment, since the acquisition in January 2018.
Additionally, we experienced growth compared to the first six months of
fiscal 2018 within our industrial cellular products, RF products and our
embedded modules, partially offset by a decline in sales of terminal
servers.

Services

Services revenue increased by $1.8 million, or 37.8%, in the first six
months of fiscal 2019 compared to the first six months of fiscal 2018,
related to increased revenues from our Digi Remote Manager and support
services.

Solutions

Solutions revenue increased by $9.9 million, or 113.0%, in the first six
months of fiscal 2019 compared to the first six months of fiscal 2018.
This increase was driven by new customer deployments, additional
purchases and equipment upgrades from existing customers, and an
increase in our recurring revenue base. We are serving just over 57,000
sites as of March 31, 2019, compared to nearly 42,000 sites a year ago.

Gross profit was $60.1 million, or 46.9% of revenue in the first
six months of fiscal 2019 compared to $48.8 million, or 49.0% of revenue
for the first six months of fiscal 2018. This $11.3 million increase was
driven primarily by our acquisition of Accelerated, increased sales from
our IoT Solutions segment, and increased sales from most of our IoT
Products. Our gross margin decline was primarily a result of product and
customer mix, increased costs associated with our transition to a
third-party manufacturer and increased amortization expense associated
with the Accelerated acquisition.

Operating income for the first six months of fiscal 2019 was $6.3
million, or 5.0% of revenue, as compared to an operating loss of $1.2
million, or 1.2% of revenue, for the first six months of fiscal 2018, an
increase of $7.5 million. This increase was a result of increased gross
profit of $11.3 million described above, offset by an increase in
operating expenses of $3.8 million. The increase in operating expenses
included $2.8 million of incremental costs, primarily employee-related,
associated with Accelerated, $3.7 million of additional employee-related
costs and $1.2 million of increased contingent consideration expense.
These were mostly offset by a $4.4 million gain from the sale of our
corporate headquarters in October 2018 and lower acquisition-related
expenses of $0.8 million.

Net income was $6.0 million in the first six months of fiscal
2019, or $0.21 per diluted share, compared to a net loss of $4.6
million, or $0.17 loss per diluted share, in the first six months of
fiscal 2018.

Adjusted EBITDA in the first six months of fiscal 2019 was $12.7
million, or 9.9% of total revenue, compared to $8.2 million, or 8.2% of
total revenue, in the first six months of fiscal 2018.

Balance Sheet, Liquidity and Capital Structure

Digi continues to maintain a strong balance sheet with no debt. As of
March 31, 2019, Digi had:

Cash and cash equivalents and marketable securities balance of $72.1
million, an increase of $9.3 million from the end of fiscal 2018. The
increase includes $10.0 million of proceeds received in the first
fiscal quarter of 2019 for the sale of our corporate headquarters.

Current contingent consideration liabilities of $8.5 million.

Customer Highlights

IoT PRODUCTS & SERVICES

A North American provider of personal transportation solutions
selected Digi’s XBee Cellular LTE Cat 1 embedded modem and
connectivity services, including Digi Remote Manager, for the primary
communication path on a mobility project. The XBee modem and
connectivity offering from Digi provides robust communications and
enabled a rapid pace of development to production without the time
risks of regulatory and carrier certifications.

A large manufacturer of people moving systems has selected Digi
cellular routers to provide core systems communications for their IoT
deployments. The Digi routers enable real-time collection of usage and
wear data that help accelerate a move to a more predictive global
maintenance model. Digi is also providing key IoT connectivity that
enhances rider experience and system safety and was chosen for our
industrial reliability and security focus in our Digi Remote Manager
platform.

A leading provider of solar energy products has selected Digi’s XBee3
ZigBee module for solar tracking systems. The XBee3 ZigBee will enable
reliable communication with gateways for remote management.

IoT SOLUTIONS

Two large school districts, one in Colorado and the other in Texas,
selected Digi SmartSense for food safety monitoring across all of
their respective campuses, approximating 480 sites in total.

A leading grocery chain in the western United States selected Digi to
provide task management in all 300+ of their stores.

A large regional hospital in Canada, is using Digi SmartSense to
monitor all lab and pharmacy locations across its entire campus.

Fiscal 2019 Guidance

For the third fiscal quarter of 2019, Digi projects revenue to be in a
range of $60 million to $64 million. EPS is projected to be in a range
of $0.02 per diluted share to $0.06 per diluted share. Adjusted EBITDA
is projected to be between $4.5 million and $6.5 million.

For the full fiscal year 2019, Digi projects revenue to be in a range of
$248 million to $258 million. EPS is projected to be in a range of $0.27
per diluted share to $0.37 per diluted share. Adjusted EBITDA continues
to be projected in a range of $24 million to $28 million.

Second Fiscal Quarter 2019 Conference Call
Details

As announced on April 4, 2019, Digi will discuss its second fiscal
quarter 2019 results on a conference call on Thursday, May 2, 2019 after
market close at 5:00 p.m. ET (4:00 p.m. CT). The call will be hosted by
Ron Konezny, President and Chief Executive Officer and Brian Ballenger,
Acting Principal Financial Officer and Acting Principal Accounting
Officer.

Digi invites all those interested in hearing management’s discussion of
its quarter to access a live webcast of the conference call through the
investor relations section of Digi’s website at www.digi.com.
Participants may also join the call directly by dialing (855) 638-5675
and entering passcode 2443699. International participants may access the
call by dialing (262) 912-4765 and entering passcode 2443699. A replay
will be available within approximately three hours after the completion
of the call, and for one week following the call, by dialing (855)
859-2056 for domestic participants or (404) 537-3406 for international
participants and entering access code 2443699 when prompted. A replay of
the webcast will be available for one week through Digi’s website.

A copy of this earnings release can be accessed through the financial
releases page of the investor relations section of Digi’s website at www.digi.com.

Digi International (NASDAQ: DGII) is a leading global provider of
Internet of Things (“IoT”) connectivity products, services and
solutions. We help our customers create next-generation connected
products and deploy and manage critical communications infrastructures
in demanding environments with high levels of security and reliability.
Founded in 1985, we’ve helped our customers connect over 100 million
things, and growing. For more information, visit Digi’s website at www.digi.com,
or call 877–912–3444 (U.S.) or 952–912–3444 (International).

Forward-Looking Statements

This press release contains forward-looking statements that are based
on management’s current expectations and assumptions.These
statements often can be identified by the use of forward-looking
terminology such as “anticipate,” “believe,” “estimate,” “looking
forward,” “may,” “will,” “expect,” “plan,” “project,” “should,” or
“continue” or the negative thereof or other variations thereon or
similar terminology.Among other items, these statements relate
to expectations of the business environment in which the company
operates, projections of future performance, perceived marketplace
opportunities and statements regarding our mission and vision.Such
statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions.Among others, these include
risks related to the highly competitive market in which our company
operates, rapid changes in technologies that may displace products sold
by us, declining prices of networking products, our reliance on
distributors and other third parties to sell our products, delays in
product development efforts, uncertainty in user acceptance of our
products, the ability to integrate our products and services with those
of other parties in a commercially accepted manner, potential
liabilities that can arise if any of our products have design or
manufacturing defects, our ability to defend or settle satisfactorily
any litigation, uncertainty in global economic conditions and economic
conditions within particular regions of the world which could negatively
affect product demand and the financial solvency of customers and
suppliers, the impact of natural disasters and other events beyond our
control that could negatively impact our supply chain and customers,
potential unintended consequences associated with restructuring or other
similar business initiatives that may impact our ability to retain
important employees, the ability to achieve the anticipated benefits and
synergies associated with acquisitions or divestitures, and changes in
our level of revenue or profitability which can fluctuate for many
reasons beyond our control.These and other risks, uncertainties
and assumptions identified from time to time in our filings with the
United States Securities and Exchange Commission, including without
limitation, our annual report on Form 10-K for the year ended September
30, 2018 and subsequent quarterly reports on Form 10-Q and other
filings, could cause the company’s future results to differ materially
from those expressed in any forward-looking statements made by us or on
our behalf.Many of such factors are beyond our ability to
control or predict.These forward-looking statements speak only
as of the date for which they are made.We disclaim any intent or
obligation to update any forward-looking statements, whether as a result
of new information, future events or otherwise.

Presentation of Non-GAAP Financial Measures

This release includes adjusted net income, adjusted net income per
diluted share and adjusted earnings before interest, taxes and
amortization (“adjusted EBITDA”), each of which is a non-GAAP measure.

We understand that there are material limitations on the use of
non-GAAP measures.Non-GAAP measures are not substitutes for GAAP
measures, such as net income, for the purpose of analyzing financial
performance.The disclosure of these measures does not reflect
all charges and gains that were actually recognized by the company.These
non-GAAP measures are not in accordance with, or an alternative for
measures prepared in accordance with, generally accepted accounting
principles and may be different from non-GAAP measures used by other
companies or presented by us in prior reports.In addition, these
non-GAAP measures are not based on any comprehensive set of accounting
rules or principles.We believe that non-GAAP measures have
limitations in that they do not reflect all of the amounts associated
with our results of operations as determined in accordance with GAAP and
that these measures should only be used to evaluate our results of
operations in conjunction with the corresponding GAAP measures.Additionally,
Adjusted EBITDA does not reflect our cash expenditures, the cash
requirements for the replacement of depreciated and amortized assets, or
changes in or cash requirements for our working capital needs.

We believe that providing historical and adjusted income and income
per diluted share, respectively, exclusive of such items as reversals of
tax reserves, discrete tax benefits and restructuring permits investors
to compare results with prior periods that did not include these items.Management uses the aforementioned non-GAAP measures to monitor and
evaluate ongoing operating results and trends and to gain an
understanding of our comparative operating performance.In
addition, certain of our stockholders have expressed an interest in
seeing financial performance measures exclusive of the impact of matters
such as the impact of decisions related to taxes and restructuring,
which while important, are not central to the core operations of our
business.Management believes that Adjusted EBITDA, defined as
EBITDA adjusted for stock-based compensation expense,
acquisition-related expenses, restructuring charges and recoveries, and
gains from the disposition of our former corporate headquarters is
useful to investors to evaluate the Company’s core operating results and
financial performance because it excludes items that are significant
non-cash or non-recurring expenses reflected in the Condensed
Consolidated Statements of Operations. We believe that the presentation
of Adjusted EBITDA as a percentage of revenue is useful because it
provides a reliable and consistent approach to measuring our performance
from year to year and in assessing our performance against that of other
companies.We believe this information helps compare operating
results and corporate performance exclusive of the impact of our capital
structure and the method by which assets were acquired.

For more information, visit Digi’s website at www.digi.com,
or call 877-912-3444 (U.S.) or 952-912-3444 (International).

Digi International Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

Three months ended

Six months ended

March 31,

March 31,

2018

2018

2019

(as adjusted)*

2019

(as adjusted)*

Revenue:

Product

$

52,097

$

47,588

$

102,909

$

86,042

Services and solutions

13,667

6,960

25,168

13,461

Total revenue

65,764

54,548

128,077

99,503

Cost of sales:

Cost of product

28,496

23,080

54,309

42,290

Cost of services and solutions

6,214

3,864

12,191

7,043

Amortization of intangibles

725

770

1,465

1,377

Total cost of sales

35,435

27,714

67,965

50,710

Gross profit

30,329

26,834

60,112

48,793

Operating expenses:

Sales and marketing

11,534

11,175

23,191

20,935

Research and development

9,569

8,617

19,087

16,368

General and administrative

8,441

6,224

11,558

12,671

Restructuring reversal

—

—

(67

)

—

Total operating expenses

29,544

26,016

53,769

49,974

Operating income (loss)

785

818

6,343

(1,181

)

Other income, net:

Interest income, net

142

34

258

239

Other income (expense), net

257

(527

)

305

(572

)

Total other income (expense), net

399

(493

)

563

(333

)

Income (loss) before income taxes

1,184

325

6,906

(1,514

)

Income tax (benefit) expense

(158

)

451

882

3,099

Net income (loss)

$

1,342

$

(126

)

$

6,024

$

(4,613

)

Net income (loss) per common share:

Basic

$

0.05

$

—

$

0.22

$

(0.17

)

Diluted

$

0.05

$

—

$

0.21

$

(0.17

)

Weighted average common shares:

Basic

27,866

27,084

27,687

26,914

Diluted

28,438

27,084

28,289

26,914

*Prior period information has been restated for the adoption of ASU No.
2014-09, “Revenue from Contracts with Customers (Topic 606)”,
which we adopted on October 1, 2018.

Digi International Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

Three months ended March 31,

Six months ended March 31,

2018

2018

2019

(as adjusted)*

2019

(as adjusted)*

Net income (loss)

$

1,342

$

(126

)

$

6,024

$

(4,613

)

Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustment

(83

)

1,787

(1,652

)

2,058

Change in net unrealized gain (loss) on investments

9

(19

)

14

(40

)

Less income tax (expense) benefit

(2

)

5

(4

)

8

Reclassification of realized loss on investments included in net
income (1)

—

31

—

31

Less income tax benefit (2)

—

(8

)

—

(8

)

Other comprehensive (loss) income, net of tax

(76

)

1,796

(1,642

)

2,049

Comprehensive income (loss)

$

1,266

$

1,670

$

4,382

$

(2,564

)

(1)

Recorded in Other income (expense), net in our Condensed
Consolidated Statements of Operations.

(2)

Recorded in Income tax (benefit) expense in our Condensed
Consolidated Statements of Operations.

*Prior period information has been restated for the adoption of ASU No.